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Thursday, November 24, 2011

Thanksgiving morning reading: Mostly Europe

by Calculated Risk on 11/24/2011 09:02:00 AM

• From the Athens News: Papademos says Samaras letter 'satisfactory'

The standoff over Antonis Samaras’ refusal to sign a written commitment that he backs austerity measures seems to have come to an end, after Prime Minister Lucas Papademos told the cabinet on Thursday that international lenders had reacted positively to the letter that the New Democracy leader sent to the country’s lenders yesterday.

"Papademos said the content of the letter was satisfactory. There is an initial positive response to it (from abroad)," a minister who attended the meeting told Reuters on condition of anonymity.
• From the WSJ: Portugal Hit by Downgrade and Strike
Fitch, which matched Moody's Investors Service's move in July to place Portugal in junk territory, lowered its rating one notch, to double-B-plus from triple-B-minus, and warned further downgrades were possible because a recession in the country will increase challenges for the government to comply with its austerity plans. It maintained a negative outlook.

"The country's large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign's credit profile is no longer consistent with an investment-grade rating," Fitch said. "However, Fitch judges the government's commitment to the program to be strong."
• From the Financial Times: France pushes hard on ECB intervention The FT reports that Nicolas Sarkozy, Italy's Mario Monti, and Angela Merkel are meeting in Strasbourg today - and Sarkokzy is expected to push for ECB intervention.

• Something else to watch from the NY Times: Economic Trouble in the West Shows Signs of Catching Up With Asia
Within the last few weeks ... cracks have emerged in the region’s mighty economies, and analysts and policy makers have become more concerned about the painful disruption that could spill into Asia as the situation in Europe continues to deteriorate and the United States’ growth remains subdued.

Exports from Asia have been softening for months as demand in Europe, in particular, has slowed.
• And on German bonds:

From Paul Krugman: The Apocalypse Trade
the big story: German bonds are now being priced as a risky asset — what the FT calls the “apocalypse trade“. The interest rate on bunds, at 2.21% as I write this, is still very low by historical standards. But it’s above the rate on UK bonds (2.17%) and way above the rate on US bonds (1.88%).

The way to see this is that the market is in effect pricing in a real possibility of eurozone collapse.
And from the FT Alphaville: Borrowing costs in the United States of Europe
[L]et’s assume we get a Eurobond as envisaged by President Barroso. What would that yield? Some 4 per cent perhaps. Lower?

Viewed in this context one can understand why investors were reluctant to buy German paper with a 1.98 per cent coupon. Why not wait and pick up double the yield on German-backed Eurobonds.

The glib answer to that question is because it will never happen. Germany will never allow it.

However, this story, which ran on Reuters overnight, suggests that Eurobonds are not completely verboten, especially if Germany could force through treaty changes to enforce budgetary discipline in the eurozone.